E-ISSN 2281-4612
ISSN 2281-3993
Academic Journal of Interdisciplinary Studies
MCSER Publishing, Rome-Italy
Vol 4 No 2
July 2015
Production Subcontracting:
A Policy Issue for Small and Medium Scale Manufacturing Industries in Nigeria
Nwokocha Victor Chukwunweike
Department Of Geography, University Of Nigeria Nsukka, Enugu State, Nigeria
Email: chukwuweike_nwokocha@yahoo.com
Prof. Madu Ignatius Ani
Department Of Geography, University Of Nigeria Nsukka, Enugu State, Nigeria
Email: Ignatius.madu@unn.edu.ng
Ocheje, Friday Johnmark
Department Of Geography, University Of Nigeria Nsukka, Enugu State, Nigeria
Email: macxims1094@gmail.com
Olerum Vivian Akunna
Department of Geography, University of Port Harcourt, Rivers State, Nigeria
Email: kunnycrucial@rocketmail.com
Nwosu Ikejiofor Gladys
Department Of Geography, University Of Nigeria Nsukka, Enugu State, Nigeria
Email: Ijeoma.ikejiofor@unn.edu.ng
Doi:10.5901/ajis.2015.v4n2p375
Abstract
This study set out to examine production subcontracting as an alternative policy strategy for the development of small and
medium scale industries in Nigeria. Using a purposive random sampling, the study selected 50 SMIs from 100 SMIs identified
from the industrial directory of the study area. Based on the literature, harnessing economic potentials of SMIs in Nigeria will
continue to be a mirage since several policies aimed at SMIs development have not stand the test of time due to poor and
erratic implementation. Analysis carried out in this study showed that while 63% of the respondents (SMI operators) were
motivated to use production subcontracting process because it reduces their cost of production, 20% of the respondent made
use it because of the market it creates for their products. Similarly, there was a general acceptance of the process as reducing
cost of operation; improving service quality, enhancing core business capacity and creation of markets were the most
commonly accepted benefits of production subcontracting by the respondents. This paper therefore recommended that
subcontracting processes be made an industrial policy or infused into the existing SMI policies so as to make them more
proactive and pragmatic in the development of SMIs in Nigeria.
Keywords: Subcontracting, Small and Medium Scale industries, Manufacturing Economic policies
1. Introduction
The role of Small and Medium Scale Industries (SM1s) in the national economy cannot be wished away. These industries
are being given increasing policy attention in recent years, particularly in third world countries partly because of growing
disappointment with results of development strategies focusing on large scale capital intensive and high import
dependent industrial plants (Kayode, 2001). The development of small and medium scale industries in an economy
guarantees the greater utilisation of local raw materials, employment generation, encouragement of rural development,
development of entrepreneurship, mobilisation of local savings, linkages with bigger industries, provision of regional
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balance by spreading investments more evenly, provision of avenue for self-employment and provision of opportunity for
training managers and semi-skilled workers (Muritala, Taiwo and Awolaja, 2012). Apart from their potential for ensuring a
self reliant industrialization, in terms of ability to rely largely on local raw materials, small and medium scale enterprises
are also in a better position to employ raw materials, guarantee a more even distribution of industrial development in the
country, including the rural areas, and facilitate the growth of non-oil exports (Oni and Daniya, 2012).
The adoption of the economic reform programme in Nigeria in 1986 has been a decisive switch of emphasis from
the capital intensive, large scale industrial project based on the philosophy of import substitution to micro, small and
medium scale enterprises with immense potentials for developing domestic linkages for rapid, sustainable industrial
development. These economic reforms started with the Structural Adjustment Programme (SAP) which was adopted to fill
the supply gap in industrial consumer goods created by the difficulties faced by large scale firms which have not easily
adapted to the policy changes of SAP (Afolabi, 2013). The little progress recorded from the courageous efforts of the first
generation indigenous industrialists was relatively wiped out by the massive dislocations and traumatic devaluation which
took place under the Structural Adjustment Programme (SAP). In view of this and in order to ensure the realization of the
potential benefits of virile SME in the economy, a number of economic policies were initiated by the Government and its
subsidiary agencies such as the Central Bank of Nigeria (CBN) and the Micro and Medium Enterprises Development
Agency of Nigeria (SMEDAN). Some of these policies which included National Economic Reconstruction Funds
(NERFUND), Small and Medium Industry Equities Investment Scheme (SMIEIS), National Poverty Eradication
Programme (NAPEP), National Economic and Empowerment Development Strategy (NEEDS), among others.
As laudable as these programs are, quite a few were able to have reasonable impacts on the development of SMIs
in the country. In order to ensure the survival of the current drive to boost the operations of SMIs in Nigeria which was
initiated by the transformation agenda of the Federal Government of Nigeria and the cluster development Approach of the
Ministry of Trade and Investment in the country, SMI programmes and policies should look beyond its present
preoccupation (Finance, weak infrastructures, multiple taxation, obsolete technology etc). This paper is therefore
oriented to examine the performance of several policies aimed at developing Small and Medium Scale Industries in
Nigeria and how these policies can be made better by the adoption production subcontracting strategies in the SMIs
sector. The rest of this paper is structured as thus: Literature review, Theoretical framework, Method and Materials,
Result and Discussion, Summary and conclusion.
2.
Literature Review
The definition of small and medium enterprises (SMIs) varies from country to country, region to region and from agencies
to agencies in today’s world. In countries such as the USA, Britain, and Canada, small-scale business is defined in terms
of annual turnover and the number of paid employees (Evbuomwan, Ikpi, Okoruwa, Akinyosoye, 2013). In the Nigerian
concepts however, the perception of SMIs are somewhat divergent. The Central Bank of Nigeria in collaboration with the
Small and Medium Industries and Equity Investment Scheme (SMIEIS) defined small and medium scale industries as any
enterprise with a maximum asset base less than N200 million (equivalent of about $1.43 million) excluding land and
working capital, and with the number of staff employed not less than 10 (otherwise will be a cottage or micro-enterprise)
and not more than 300 (Sanusi 2003; Udechukwu 2003; Akabueze 2002; SMIEIS 2002; and Sanusi 2004).
Similarly, a plethora of studies have been dedicated on the activities and performance of small and medium scale
industries in Nigeria. These studies which have been analysed under different perspectives have been geared towards
economic and industrial development of Nigeria. Some of the areas where this sector has been examined include finance
(Osoba, 1987; Etim, 2010; Akingunola, 2011; Evbuomwan et.al, 2013, Afolabi, 2013; Adigwe, 2012), Economic growth
and development (Adelaja, 2002; Oluba, 2009; Ogunsiji and Ladamu, 2010; Asta and Zaneta, 2010; Ayozie, 2011)
Constrains to SMI development (Aremu and Adeyemi; 2011, Chidi and Shadare, 2011; Agwu and Emeti, 2014). The
innovations of these studies have rarely culminated into any tangible solution to the plethora of problems bedevilling the
small and medium scale sector in the country. While most of them have no stack differences from the existing SMIs
policies and programmes, others lack practicable and realistic drive with which to proffer solutions to the existing status
quo. The above scenario has equally been the bean of various economic policies and programmes mapped out by both
the government and its agencies for the revival and sustenance of the sector. Most of these policies were not structured
with the organizational characteristics of the SMIs in country and this as a result have made impossible for these policies
to achieve positive results in the country. For instance most credit facilities made available for the development of SMIs in
the country can only be accessed by formal SMIs who are registered with the Government while it is on record that more
than 60% of SMIs in Nigeria are informal and are not registered with the Government (Survey report on Micro, Small and
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Medium enterprises in Nigeria, 2010). This according to the report has not only made the policies to suffer serious under
achievement it has equally made the SMIs in the country unproductive. Generally most of the policies as will be seen in
the next section lacked both the proper economic articulation to move the sector forward.
2.1
A review of economic policies and programmes for SMIs development in Nigeria
Over the years a number of policies have been formulated by the Nigerian Government with a view to developing Small
and Medium Scale Industries. These policies include funding and setting up industrial areas and estates (to reduce
overhead costs), providing local finance through its agencies such as the Central Bank of Nigeria, Federal Ministry of
Industries (Small-scale industry credit scheme - SSICs), Nigerian Industrial Development Bank (NIDB), and Nigerian
Bank for Commerce and Industry (NBCI). Others include facilitating and guaranteeing external finance through the World
Bank, African Development Bank and other International Institutions willing to, and capable of assisting SMEs, Setting up
of erstwhile National Economic Reconstruction Fund (NERFUND) which is a source of medium to long-term local and offshore loans for small and medium scale businesses, particularly those located in the rural areas. To buttress our points,
the following policies will be critically x-rayed. These policies are:
2.1.1 The Central Bank of Nigeria special credit programme for Small and Medium Scale Industries (SMIs).
The central bank of Nigeria is the principal agent for implementing government financial and monetary policies and has
over the year introduced a number of schemes for promoting improved access to credit for industrial development
particularly in SMIs (). The thrust of the schemes under the bank’s monetary policy guidelines of 1988 was that at least
10% of commercial bank loans and advances were allocated to SMIs. In April 1980, loans and advances available to
SMIs rose from 10% to 20% in January, 1991. (Bullion and CBN 1992) It was also clearly stated that stringent penalties
await those who disregard the directive. In reality, this scheme has not succeeded. This is because the relationship
between commercial banks total credit to loans to small and medium scale industries from 1992 to 2006, made it clear
that this sector has not fared well in going to financial institutions to advance credit (see table 1).
Table 1: Ratio of loans to small scale enterprises to commercial banks' total credit (1992-2006)
Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Commercial Banks
Loans to SMIs (N'm)
20,400.0
15,469.9
20,552.5
32,374.5
42,302.1
40,844.3
42,260.7
46,824.0
44,542.3
52,428.4
82,368.4
90,176.5
54,981.2
50,672.6
21,201.7
Commercial Banks
Total Credit (N'm)
41,810.0
48,056.0
92,624.0
141,146.0
169,242.0
240,782.0
272,895.5
353,081.1
508,302.2
796,164.8
954,628.8
1,210,033.1
1,519,242.7
1,899,346.4
2,385,638.3
Commercial Bank
Loan to SMIs as % of total credit
48.8
32.2
22.2
22.9
25.0
17.0
15.5
15.3
8.7
6.6
8.6
7.5
3.6
2.7
0.9
Source: CBN Statistical Bulletin Vol. 17, 2006
Furthermore, it has also been shown that funding of small and medium scale industries in Nigeria is mainly from personal
savings. This was corroborated by the findings of Adebusuyi (1997) and the Nigerian institute for Social and Economic
Research (NISER) which opined that personal savings and family contributions to the funding of small and medium scale
industries stood at 96.4% and 73% respectively while that of the formal sector stood at 0.21% and 2% respectively.
From the Central Bank of Nigeria report, the situation has not shown any significant changes from the evidence in the
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reports of the research studies and other related researches and literature on the same subject (Etim, 2010).
2.1.2 Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN)
The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) was established in 2003, to facilitate the
promotion and development of a structured and efficient Micro, Small, and Medium Enterprises (MSMEs) sector that will
enhance sustainable economic development in Nigeria (Agwu and Emeti, 2014). The Agency is the apex and
coordinating institution for all matters relating to starting, resuscitating and growing MSMEs in Nigeria. This agency was
structured to facilitate the access of micro, small, and medium entrepreneurs/investors to all resources required for their
development as well as to establish a structured and efficient micro, small, and medium enterprises sector that will
enhance sustainable economic development of Nigeria (Survey report on Micro, Small and Medium enterprises in
Nigeria, 2010). However, SMEDAN which would have been pragmatic in its operation does not have wide coverage.
Going by the survey exercise carried out by, it was revealed that most of the industrialists are not aware of SMEDAN.
About 45.5% of the industrialist claimed ignorant of the agency’s activities across the country (Survey report on Micro,
Small and Medium enterprises in Nigeria, 2010). Similarly, about 90.5% of the industrialists claimed that they have not
benefited from SMEDAN Services (Survey report on Micro, Small and Medium enterprises in Nigeria, 2010).
2.1.3 The Small and Medium Enterprises Equity Investment Scheme (SMEEIS)
The SMEEIS initiative was in response to the Federal Government’s concerns and policy measure towards the
aggressive and radical transformation of the sub-sector through the provision of adequate and cheaper funding. All the
commercial banks operating in Nigeria were required to set aside 10% of their profit after tax (PAT) for equity investment
in small and medium enterprises in Nigeria. The cumulative sum set aside by the banks under the scheme as at
December, 2009 was N42 billion. However, the scheme did not achieve the desired impact as most SMIs were not
interested in the equity participation for fear of losing control of their enterprises. Even then, most of them lack the 60%
equity contribution which resulted in delay disbursement as the borrowers were deemed to be uncooperative (Oluba,
2009). This was also corroborated by the works of Evbuomwan et al (2013) which revealed that too many stringent
requirements for the assessment of SMEEIS credits with 48.1% and long/cumbersome processing period which scored
37% lead to collapse of the scheme in Nigeria. The above analyses have shown that most policies and programmes
initiated by the Government and its Agencies have not been able to improve the status of SMIs in Nigeria. This paper
therefore looks at how the infusion of industrial cooperation through production subcontracting into the SMI programme
and policies in Nigeria can aid the development of the sector.
3.
Theoretical Framework of Subcontracting
Subcontracting is usually defined as a situation where the firm offering the subcontract requests another independent
enterprise to undertake the production or carry out the processing of a material, component, part or subassembly for it
according to specifications or plans provided by the firm offering the subcontract (Holmes, 1986; Taymaz and Kilicaslan,
2005).
There are two approaches to subcontracting in entrepreneurship development, namely: the traditional and the
modern approaches (Watanabe, 1971; Berger & Piore, 1984; Holmes, 1986). The traditional approach looks at
subcontracting as unequal, asymmetric power relationships between two different sets of enterprises: the large firms and
the small firms (Berger & Piore, 1984; Holmes, 1986; Watanabe, 1971).
The modern approach treats subcontracting as a network of cooperative inter-firm links among interdependent
small firms forming a business ecosystem (Taymaz & Kilicaslan, 2002; Tilman, 2004; Ceglie & Dini, 1999; Rama &
Calatrava, 2002). This approach, looks at a group of firms cooperating (and competing) within a complex web of
supportive institutions. Externalities, linkages and economics of scale generated by this form of cooperation and
competition are internalized by the network so that the collective efficiency and flexibility of the industry is enhanced.
Ceglie and Dini (1999) suggest that on the account of the common problems firms all share, small and medium scale
firms are in the best position to help each other. They can do this through horizontal cooperation (they can collectively
achieve economies of scale), vertical cooperation (they can specialize in their core activities and develop the external
division of labour) and networking among enterprises, providers of business development services, and local policy
makers.
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Considering the orientation of this paper, the modern approach to production subcontracting will be used to access
the impact of subcontracting on the SMIs in the region
4.
Methods and Materials
The purpose of this study was to examine production subcontracting as an alternative policy strategy for the development
of SMIs in Nigeria following its impacts on SMIs in Onitsha Metropolis Anambra State Nigeria. To achieve this, both
secondary and primary data were used for the study. Secondary data were sourced from published journals, textbooks;
internet and other documentary materials. These sources provided the base for both the literature and the theoretical
framework of this paper. With the aid of a structured questionnaire, primary data were sourced from small and medium
scale industries identified in the 2006 industrial directory of the Ministry of Commerce and Industry Awka, Anambra State
Nigeria (Manufacturers Association of Anambra State, Nigeria 2006). Using a purposive random sampling technique, the
study selected 50 SMIs from 100 SMIs identified from the industrial directory in the study area. This number was selected
in order to effectively manage the cost of this research. Open and closed ended - structured questionnaire was used to
gather information on firm characteristics, subcontracting motivations, benefits of production subcontracting as well as
their constraints. A combination of analytical tools was employed in order to achieve the objective of the study. These
include descriptive statistics of mean and standard deviation. Tables and charts were also used to present results. All
analyses were carried out with the aid of Statistical Packages for Social Sciences version 17 (SPSS 17).
5.
5.1
Results and Discussion (Analysis of Production Subcontracting)
Structural Characteristics of Industries
This paper adopts the classification of SMEDAN (2007) which is based on dual criteria, employment and assets
(excluding land and buildings) of the industrial units.
The size of firms entails measuring the average number of employees in each of the industries. Size of an industry
reflects how large or small an enterprise is in terms of employment. With reference to SMEDAN (2007) classification of
small and medium scale industries in Nigeria, industries units with a maximum asset base between 5 and less than N 50
million excluding land and working capital and with the number of staff employed between 10 and 49 can be referred to
as small scale industries while industries with an asset base between 50 and less than 500 million including working
capital but excluding cost of land and with a labour size of between 50-199 workers can be regarded as medium scale
manufacturing industries. Based on this classification, it was revealed that 68.0% of the industries employed between 1049 workers, a further 28.0% employed between 50 and 199 workers while 4.0% of the industries employed more than
199 workers (see table 2).
Table 2: Size of industries in the Study Area (number of employees).
Asset Base (Million N-Naira)
N5 and less than N 50
N 50 and less than N500
Above
Total
No of Employees
10-49
50-199
More than 199
Frequency
34
14
2
50
Percentages (%)
68.0
28.0
4.0
100
Source: Field work 2014
The result in table 2 has shown that industrial activities in the study area were dominated by small and medium scale
industries. This means that small and medium scale industries are the fulcrum of industrial activities in the study area.
This goes to show that the area is at the centre of entrepreneurship development driven by individual creativity and
innovation which and forms the vanguard of the modern enterprise sector and a propelling force for economic
modernization (Nwokocha, 2014).
5.2
Production subcontracting decisions by firm size
Production subcontracting decisions by firm size revealed that industries employing between 10-49 workers have a
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subcontracting percentage of 68.0 % while the other industries employing between 50-199 workers and above 199
workers have 10% and 4% share respectively (see fig 1)
Figure 1: Percentage of production subcontracting decision by firm size
The result in fig 1 shows that the industries identified in the study area makes use of production subcontracting. The
result also revealed that not all the industries make use of this production process. From our investigation, only 10% of
the medium scale industries in the study area are more likely to offer subcontracting processes while the remaining 18 %
were not engaged in the process. This from our observation was largely due to their ability to accommodate most of their
production processes in-house while importing other essential parts. Furthermore, while some industries were not
engaged in production subcontracting because of the former reasons, others more especially the small scale industries
were engaged in this production process because going by their capital base and structure, they were unable to fund all
the processes leading to the production of a finish goods in their industries and therefore outsourced those parts and
components that were not within their core competencies to other independent industries.
5.3
The Motivations of Production Subcontracting
There are a good number of reasons why small and medium industries engage in production subcontracting. From our
investigations, it was observed that SMIs engage in this production process in other to reduce production cost, increase
flexibility, gain access to an already made market it provides and to concentrate on their core competence. The analysis
of these motivations shows that 54% of the respondents were engaged in production subcontracting in order to achieve
reduction in their production cost while 20% of the respondents made use of the process because it creates an already
made market for their products. This particular scenario was observed in the plastic, rubber and allied SMIs where items
produced by these industries are used by other industries in packaging and distribution of their products. This kind of
synergy was observed to exist between plastic, rubber and allied firms and food and chemical industries and this has lead
to the reduction in the cost of production in some industries and creating markets for the other industries. Similarly, 15%
of the respondent made use of this production process in order to increase flexibility in their industries while 11% made
use of it in order to concentrate on their core competence (see fig 2).
Figure 2: Percentage Distribution of Motivations of Production Subcontracting
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The above result has shown that this work not only supports the modern theoretical approach to subcontracting which
treats subcontracting as a network of cooperative inter-firm linkage among interdependent SMIs forming a business
ecosystem it has also shown that this process has a direct impact on the industrial activities of SMIs in the study area.
This can also be corroborated by the Taymaz and Kilicaslan, (2004) which stated that the main benefits accruing to firms
from subcontracting are the advantages of flexibility and cost reduction. The firms may seek to subcontract a part of their
(unskilled labour-intensive) production operations to take advantage of lower wages in other firms. Subcontracting can
also be used by firms to cut the fixed costs, because they can spread out their costs through subcontracting and this on
the other hand, encourages the production activities in small and medium scale industries (Abraham and Taylor, 1996).
The facts above have shown that rather than develop economic policies that will address such problems as
finance, infrastructure, double taxation, etc which has constantly formed the framework of the policies formulated to
develop SMIs in Nigeria both in the past and at present, it could be more productive if practicable economic strategies
such as production subcontracting are initiated in order to help industries reduce their cost of production and create
markets for their products. In other words economic strategies initiated to galvanise this sector should lay more emphasis
on externalisation. The externalization processes will not only lead to production cost reduction; it will also create already
made market for the industries as well as reducing the cost of establishing and running new industries in the country.
5.4
Benefits and Constraints of production subcontracting
The benefits of production subcontracting are immeasurable. In a broad sense subcontracting can satisfy the need of
traders and producers to reap the gains of specialization and low cost of production. In particular subcontracting may
offer an improvement over the original situation of small, medium and large scale producers. Furthermore, not only does
this arrangement enables greater flexibility of production and adjusting easily to changing demand patterns,
subcontractors have got the assurance of a secure market for their products. This enables them to sale the products
without difficult marketing efforts and to concentrate on other aspects of production and management process.
In view of this, seven (7) common factors were synthesized from the field observations as the common benefits of
production subcontracting in the region. These benefits were synthesized based on the responses of the industrialist who
were asked to rank these benefits on a five point likert - type scale ranging from 1 = “not at all important” and 5 = “very
important” in relation to their operational experience and according to how they apply to their industries. The result is
presented in table 3.
Table 3: Descriptive Statistics showing the benefits of production subcontracting
Variables
Create an already made market
Improves service quality
Access advance technology
Decrease and sharing of risk
Expands market and enhance competition
Release key internal resources
Reduce Operation cost
Valid N
N
Statistic
50
50
50
50
50
50
50
50
Range
Statistic
2.00
1.00
1.00
2.00
3.00
3.00
3.00
Minimum
Statistic
3.00
4.00
3.00
3.00
2.00
2.00
2.00
Maximum
Statistic
5.00
5.00
4.00
5.00
5.00
5.00
5.00
Mean
Statistic
4.12
4.52
3.65
3.55
3.38
4.18
4.23
Std
Deviation
0.61
0.50
0.48
0.65
0.69
0.72
0.77
Source: Author’s computation and Field work 2014
From the analysis in table 3, there is a positive overall view regarding the benefits of production subcontracting. Reducing
cost of operation, improving service quality, enhancing core business capacity and creating an already made market with
average mean and standard deviation values of 4.23 (SD = 0.77), 4.52 (SD = 0.50), 4.12 (SD= 0.61), and 4.18 (SD =
0.72) respectively were the most commonly accepted benefits of production subcontracting by the respondents
(Industrialists). This is because most of these small and medium scale industries have highly standardized production
processes and with great differences in the labour, capital, and skill-intensiveness of the different stages that make up
these processes, they subcontract most of these stages in order to enjoy the benefits of production subcontracting as
was mentioned above. Compared with the previous analyses, these factors were also significant in the decisions to
engage in production subcontracting by the industries in the study area. Furthermore, these results support the existing
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findings of Pagnocelli, (1994) and Quinn and Hilmer, (1994) which state that industries that make strategic use of
subcontracting arrangements can become focalized, streamlined and agile in their operations and subcontracting
peripheral activities can allow the organization to concentrate on its core businesses, thereby enabling the organization to
maximize their return on internal resources. It also supports the findings of Tijun, Sandal, Jiehong and Dandan (2009)
which states that reducing costs, focusing on core business functions, improving the quality of service and releasing key
internal resources effectively are the common accepted advantages of outsourcing in East China.
5.5
Limitations of production subcontracting
Despite the benefits of production subcontracting, there are some other problems limiting an effective production
subcontracting in the region. These problems based on our observation in the field have been synthesized into seven
factors, and how they appeal to the industries were analysed using a five point likert - type scale ranging from 1 = “not at
all important” and 5 = “very important” in relation to how they affect the industrialist (table 4).
Table 4: Descriptive Statistics showing the limitations of production subcontracting
Variables
Lose control of the business
Legal disputes
Weaken culture
Decrease compatibility of innovation
Disclosure of commercial secrets
Interest conflicts with subcontracting partners
Unfulfilled orders from subcontractors
Valid Number
N
Statistic
50
50
50
50
50
50
50
50
Range
Statistic
0.00
0.00
2.00
1.00
3.00
3.00
1.00
Minimum
Statistic
2.00
2.00
1.00
3.00
2.00
2.00
3.00
Maximum
Statistic
2.00
2.00
3.00
4.00
5.00
5.00
4.00
Mean
Statistic
2.00
2.00
1.82
3.52
4.23
4.18
3.52
Std
Deviation
0.00
0.00
0.72
0.50
0.77
0.72
0.50
Source: Author’s computation and fieldwork (2014)
The analysis showed in table 4 revealed that the majority of the industries believed that engaging in production
subcontracting has a number of risks associated with it. From the analysis in table 17, most of the industries identified:
disclosure of commercial secrets, interest conflicts, decrease compatibility of innovation and Unfulfilled orders from
subcontractors with mean and standard deviation values of 4.23 ( STD = 0.77), 4.18(STD = 0.72), 3.52 (STD = 0.50) and
3.52 (STD = 0.50) respectively as the major problems encountered in the process of engaging in production
subcontracting while legal disputes, lose control of the business and weaken culture with mean and standard deviation
values of 2.00 (STD = 0.00), 2.00 (STD = 0.00 )and 1.82 (STD = 0.72) respectively were seen by the respondents as
posing little or no problems to them. Disclosure of commercial secret and interest conflict with subcontractors with mean
values of 4.23 (STD = 0.77) and 4.18 (STD = 0.72) appear to be the greatest limitations facing this process. Most of the
industrialists interviewed had experienced these problems at one time or the other making them either to change their
subcontracting partner or acquire the capacity to handle the activity (ies) in house. For instance the industrialist in
aluminium and metal industries complained that their subcontracting partners steal their designs, styles and ideas. These
designs according to them are either sold to their business rivals or they are used by the subcontractors to manufacture
their own products causing them serious losses in business. Other problems disclosed by the industrialist in the course of
the field work include: lack of mutual trust between industries and the absence of an established institution which is able
to link these industries in such a way that industries can easily find subcontracting partners within or outside their
localities. About 50% of the industrialist disclosed that lack of mutual trust between industries hinders their willingness to
engage in this process. This according to them is caused by disclose of commercial secrets by their subcontracting
partners and constant cases of unfulfilled order. But however, they were quick to reiterate that despite these short
comings, the practice have come to stay as most of them do not have enough resources to handle all their production
process in-house.
These limitations and challenges that constitute a set back to the advancement of this process can be solved by
developing a subcontracting agreement model that will encompass, among others things, the duties and responsibilities
of both the contractor and subcontractor in accordance with the existing laws and practices in the world. This agreement
model will evolve a respectable and acceptable code of business behaviour on both sides to guide this arrangement. This
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code of business behaviour will encompass a body of laws and principle which will be helpful for firms to make the
rational decision or to seek redress once there is bridge of contract.
6.
Summary of Findings and Conclusion
Based on the findings in the study, economic policies and programmes initiated by both the Government and its
subsidiary agencies have made little or no progress in developing and rejuvenating the small and medium scale sector in
Nigeria. This can be seen from the achievement of the various programmes initiated by the authorities to this effect.
Programmes such as the special credit programme for SMIs development initiated by the CBN, have shown that the
overall contribution of the formal sector to the growth and development of SMIs in the country stood at 0.21% and 2%
respectively while the relationship between commercial banks total credit to loans to small and medium scale industries
from 1992 to 2006, made it clear that this sector has not fared well in going to financial institutions to advance for credit.
Similarly, it was also revealed that about 45.5% of the industrialist in Nigeria claimed ignorant of the SMEDAN
activities across the country (Survey report on Micro, Small and Medium enterprises in Nigeria, 2010) while about 90.5%
of the industrialists claimed that they have not benefited from SMEDAN services since its inception (Survey report on
Micro, Small and Medium enterprises in Nigeria, 2010). The facts above have shown that rather than develop economic
policies that will address such problems as finance, infrastructure, double taxation, etc which has constantly formed the
framework of the policies formulated to develop SMIs in Nigeria both in the past and at present, it will be more productive
if economic policies targeted at the revitalization of SMIs in the country look beyond the usually mundane issues of
finance, infrastructure, double taxation etc.
Building on the above findings, this paper revealed that industrial activities in the study area were dominated by
small and medium scale industries. This means that small and medium scale industries are the fulcrum of industrial
activities in the study area. While majority of the industries are inclined to the use of production subcontracting, reduction
in the cost of production was the major driving force behind the adoption of the process by the industrialist.
Similarly, the paper also revealed that there is a positive overall view regarding the benefits of production
subcontracting. Reducing cost of operation, improving service quality, enhancing core business capacity and creating an
already made markets were the commonly accepted benefits of production subcontracting by the respondents
(Industrialists) in the study area while disclosure of commercial secrets, interest conflicts, decrease compatibility of
innovation and Unfulfilled orders from subcontractors were the major problems encountered in the process of engaging in
production subcontracting.
This paper so far has shown that development of the SMI sector in Nigeria cannot rely solely on the existing
economic policies and programmes. Most of these policies and programmes adopted by the authorities were not
formulated and guided by the operational characteristics of SMIs in the country and therefore lacks the necessary
framework to address the problems of the sector. Following the observations and findings made in this paper,
externalization of production function through production subcontracting have shown a greater and a more imminent
impact on the activities of the sector. This assertion can be supported by our findings on the motivations and benefits of
subcontracting which underscored cost reductions as the major proponent of this process. This was affirmed by about
50% of the respondent while approximately 78% of the industries in this sector (small scale industries-68%, medium
scale industries- 10%) make use of this process. In other words small and medium scale firms are in the best position to
help each other. They can do this through horizontal cooperation (they can collectively achieve economies of scale),
vertical cooperation (they can specialize in their core activities and develop the external division of labour) and networking
among enterprises.
7.
Conclusion
There is no doubt that SMIs contribute tremendously to the nation’s economic development. Harnessing these economic
potentials of SMIs in Nigeria will continue to be a mirage since several policies aimed at SMIs development have not
stand the test of time due to poor and erratic implementation. This situation however can be improved upon if SMIs in the
country are made to adopt externalisation processes through subcontracting in their industrial activities. The impact of
this process which stems from production cost reduction and creation of markets to the general acceptability of the
process by SMIs in the study area will not only help in the development of the sector, it will also help reduce the drive for
the importation of industrial parts and components by SMIs, creating more opportunities for new SMIs to be established.
On the strength of these facts, this paper therefore recommend that subcontracting as a production process be
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made an industrial policy or infused into the existing SMI policies so as to make them more proactive and pragmatic in
solving SMIs problems in Nigeria.
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